Where Does a Menu Price Come From?
While there are those in the restaurant business who know where a menu price comes from, we created this short guide to provide information to those curious about how a chef goes from ingredient prices to menu prices.
To begin, we’ll start with the menu cost equation, and then explain the individual elements that make up that menu cost.
Menu Price = (Fixed Cost Per Unit + Labour Cost Per Unit + Food Cost) x (1+margin percentage)
This may look complicated, but once each element is explained, the equation will make sense. The components are:
- Fixed Costs
These costs are one of the most difficult to attribute to menu prices, as they must be attributed based on expected sales. An overestimate on the sales means the prices will be below the breakeven point, and an underestimate on the sales means your margins will be much larger in actuality. These costs include rent, utilities, internet, insurance, etc., and are all costs that don’t change as a total based on the number of units sold.
- Labour Costs
Many times, labour costs are overlooked by onlookers, and yet they make up a large portion of the menu price. Like fixed costs, they are attributed based on a per unit basis, and while technically fixed, are broken out separately, allowing for additional analysis. These labour costs include not only the chefs and servers, but also the host and hostesses, maintenance staff, management, and anyone else that helped make your experience possible.
- Food Costs
The element that most people directly associate with menu costs is the food cost, as it’s what they’re consuming. What most people don’t realize is that the food cost is typically between 30-40% on average, meaning there is only 60-70% of that cost attributed to other elements.
- Delivery/Takeout Platform Service Fees
You’ll notice that this component was not added into the menu price calculation. These fees can account for up to 40% of sales through the platform, and while some restaurants choose to add it onto their online menu price on each platform, others will continue with their original pricing and eat the cost. For this reason, we have left it out.
After all of these individual elements are accounted for, the final price is determined by taking these costs, adding them all together, and multiplying by (1+margin percentage) to attain our final menu price. If the desired margin was 30%, you would multiply by 1.30)
As you can see, the menu price equation is simple at its core, but is fundamental to operating a successful restaurant.